Platform Competition Under Network Effects: Piggybacking and Optimal Subsidization

A repeated challenge in launching a two-sided market platform is how to ignite the cross-side network effects to jump-start adoption. Prior literature often addresses this issue by using pricing controls—a high price on one side to raise the margin and a low price on the other to attract users—or the “seesaw principle.” More recently, platforms are increasingly embracing nonpricing controls to accelerate user adoptions. Little is known, however, about the role of nonpricing controls and their interplay with pricing controls. In this research note, using a game-theoretic framework, we study “piggybacking”—that is, expanding the focal market to recruit exclusive users from external networks—as a new and nonpricing control to launch platforms in conjunction with pricing controls. We first consider consumer-side piggybacking. In a standard “competitive bottlenecks” setting in which consumers single home and providers multihome, we provide a rich set of novel insights into strategies that platforms use to monetize exclusive access to external users with nontrivial characterizations of the interplay among piggybacking, cross-side network effects, and price competition. We identify necessary and sufficient conditions when piggybacking is profit improving and when it leads to a prisoner’s dilemma, depending on the piggybacking cost and strengths of cross-side network effects. Among others, we show that, if the platforms’ equilibrium strategies were to subsidize consumers (when provider-side network effects are stronger than consumer-side network effects), piggybacking may intensify rather than ease price competition. In contrast, if the platforms’ equilibrium strategies were to subsidize providers (when provider-side network effects are weaker than consumer-side network effects), piggybacking may ease price competition. Interestingly, piggybacking reinforces the seesaw principle for the piggybacking platform. We provide a full characterization on such nontrivial equilibrium outcomes. We then consider provider-side piggybacking, and we show that the insights are qualitatively the same as consumer-side piggybacking except that the prisoner’s dilemma disappears if piggybacking providers multihome. Managerial implications for platform practitioners are also discussed.